Boeing's Options After Its Legacy Military Aircraft Wind Down

September was not a good month for Boeing’s military platforms. Last week, South Korea’s air force indicated that Boeing’s F-15SE (Silent Eagle) proposal, which had earlier been selected as sole compliant bidder by the country’s Defense Acquisition Program Administration (DAPA), would not be acceptable for the FX-3 fighter competition. In short, the RoKAF implied, the service wanted Lockheed Martin’s F-35 Joint Strike Fighter. Also this month, Boeing announced that the C-17 strategic transport would end production in 2015, after the next 22 planes are delivered.

Some of these last batch aircraft are being built on spec, albeit for likely customers.

The short-term survival of the F-15 line isn’t a problem for Boeing. The company has just started building 84 planes for Saudi Arabia. But the RoKAF’s harsh pronouncement effectively kills the F-15SE proposal, and eliminates any hope of finding a sixth F-15 export customer (Japan, Israel, Saudi Arabia, Singapore, and South Korea are the sole members of this exclusive club). It also means that the current Saudi Arabian order will almost certainly be the last major sales success, and that the line will close in 2018 or 2019. But this development, and the C-17 announcement, highlight a serious military platform sunset problem.

The F-15 and C-17 are the second and third most important Boeing military aircraft in terms of revenue, but the F/A-18 is first. This too is an endangered product. Unless the US Navy changes its mind (procurement is scheduled to end in the next fiscal year) or an export order arrives, the F/A-18E/F Super Hornet will shut by 2016. So far, there is only one export customer, Australia. Brazil’s FX-2 competition was the best hope for an order, but given the Brazilian economy and animosity towards the US, this looks unlikely. Meanwhile the V-22 tiltrotor (built in partnership with Textron’s Bell unit) is ramping down too, along with all US military rotorcraft, including Boeing’s CH-47 transport. Only the AH-64 attack helicopter looks secure for the long run.

Boeing Military Aircraft (BMA, which builds all Boeing fixed and rotary wing military aircraft, along with missiles and other munitions) provided 50% of Boeing Defense, Space & Security (BDS) revenue for 2012, and over 50% of its profit. BDS’s Global Service & Support arm, whose primary business is to support Boeing’s platforms worldwide, provided BDS with just over 25% of its revenue and another 33% of its profit. Boeing has played up its network warfare and space market capabilities as a source of growth, but after many years of trying they have not come close to matching BMA’s numbers.

As Boeing’s legacy platforms ramp down, the company has five ways to compensate for the loss of revenue. The first is to double down on what they’ve got. The company has proposed major and minor derivatives of existing platforms in order to stimulate customer interest (and, as a fallback, to keep the current fleet in service longer through upgrades). The failure of the F-15SE, and the failure of several C-17 proposals (including a commercialized version) is hardly encouraging, but a variety of F/A-18E/F and EA-18G enhancements could well convince the Navy to procure follow-on batches of the plane after the current program of record ends.

The second is to continue emphasizing military derivatives of civil jetliners. This is easily the most promising segment for future growth. The KC-46 (767-based air-to-air refueling tanker) and P-8 (737NG-based maritime patrol and anti-submarine warfare jet) programs are still ramping up. The Air Force also needs an RC-135 Rivet Joint replacement, a new Air Force One, and a second-phase tanker recapitalization program. While these programs won’t involve new platform design teams, they do help the company retain military systems integration capabilities, and provide strong revenue potential as well.

The third is to focus the company’s attention on the Air Force’s Next Generation Bomber (NGB), which is easily the most important new military program on the horizon. The NGB program could involve production of 75 new strategic combat aircraft that could enter service in the mid 2020s. Since Boeing is responsible for the bulk of the USAF’s bomber portfolio (B-52, B-1) they have a very strong chance for this new program, which remains one of the Air Force’s three highest priorities (along with the F-35 Joint Strike Fighter and KC-46 tanker). The main problem here is that Northrop Grumman has the most recent bomber design experience, with the B-2, and they will aggressively pursue this opportunity. Lockheed Martin will likely bid as well, and at one point Boeing and Lockheed Martin had agreed to team on this program. While this teaming arrangement was later suspended, it clearly showed that both companies regard Northrop Grumman as the primary threat. And for Boeing, NGB will likely be viewed as a must-win program.

The fourth approach is grow the company’s platform portfolio through partnerships. There have been two intriguing examples of this so far, which could see Boeing play a marketing and support (and perhaps production) role. The first was an agreement with Brazil’s Embraer to cooperate on the KC-390 twin turbofan military cargo aircraft. The second was an agreement with Saab to cooperate on a version of the Gripen light fighter for the Air Force’s T-X program. While the recent history of international military platform cooperation hasn’t been stellar, Boeing did successfully work with British Aerospace (today BAE Systems) on adapting the Harrier vertical fighter and Hawk jet trainer for US acquisition (as the AV-8 series and T-45, respectively).

Finally, Boeing will consider acquisitions to improve its defense portfolio. This is the most difficult option, but it may need to be considered if the other initiatives prove inadequate. Boeing is the only US aerospace company to have no F-35 exposure. Acquiring Northrop Grumman’s aircraft unit would solve that problem, as the company is responsible for all F-35 center fuselages (along with the back end of the F/A-18 series). This acquisition would also strongly enhance the company’s NGB bid. Another possibility is a bid for BAE Systems’ aircraft unit, which also has a large F-35 share. Due to BAE’s key role in programs such as Eurofighter which compete with Boeing products, this would be a far less likely development. In both cases, there are doubts about the two companies’ willingness to sell their aircraft units, and Boeing would be far less enthusiastic about acquiring either company in its entirety.

Boeing will likely examine all of these initiatives, and pursue most of them. The results should produce enough military revenue to compensate for the loss of those legacy McDonnell Douglas platforms. But the events of this month have given an urgency to these plans.